IEA - Shadow MPC votes to hold interest rates for risk of monetary overkill
At its most recent meeting, the Shadow Monetary Policy Committee has recommended that interest rates be held at 3.5 per cent at upcoming next MPC meeting. Five members voted for a hold, with two preferring a 25 basis points rise (0.25%) and two preferring 50 basis points (0.5%).
It is notable that this Committee was one of the earliest voices warning about inflation as a consequence of excessive monetary loosening late in the Covid crisis and was early off the mark to urge interest rate rises in response.
The Committee’s view is that the current cycle of tightening should end now or very soon – even two of those members that an immediate rise felt that that should be the last rise for now. The view that marked further rises, along with additional quantitative tightening, are required to bring inflation back to target was considered by this Committee not to reflect the data.
The Committee’s view was that the data on broad money growth indicated that there was already a marked slowdown and that in real terms broad money growth is negative. Too many additional rate rises would induce unnecessary recession or make recession unnecessarily deep, leading to a marked undershoot of the inflation target.
There was some debate, however, about the implications for the current decision. The dissenting minority that favour some further interest rate rises noted that the monetary and real economy developments had been predicated upon market expectations of further rate rises and although the market may have anticipated too many such rises it could be destabilizing if there were no further rises at all.
Some members also noted that previous expectations that a recession would do some of the counter-inflationary “work” might prove awry – it is possible that the UK may escape recession altogether or that, if there is one, it is only mild.
The Shadow Monetary Policy Committee (SMPC) is a group of independent economists drawn from academia, the City and elsewhere, which meets physically for two hours once a quarter at the Institute for Economic Affairs (IEA) in Westminster, to discuss the state of the international and British economies, monitor the Bank of England’s interest rate decisions, and to make rate recommendations of its own. The inaugural meeting of the SMPC was held in July 1997, and the Committee has met regularly since then. The present note summarises the results of the latest quarterly meeting held by the SMPC.
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The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.
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